Isramart : Europe Warming to Carbon Tax

Isramart news:
European governments are warming to the idea of taxing end-users directly for their carbon emissions. France, despite popular opposition, has announced it will introduce a so-called carbon tax next year, and Ireland has suggested it may do the same.

But why now? And is this a trend that could spread throughout Europe or to other countries?

The idea is not new. In the early 1990s, the European Commission attempted to impose a regional carbon tax, but it failed as member states, including France, rejected the concept of allowing tax policy to be controlled by Brussels. Instead, policymakers and industry agreed on the European Emission Trading Scheme, in which carbon credits are traded.

But the system hasn’t been all that effective, most agree, although its real implementation won’t start until 2013. Still, less than half of the block’s emissions are actually included in the trading scheme. Industries are also allocated a number of credits for free, thus pushing prices lower and eroding the incentive to cut their carbon emissions.

In announcing his decision earlier this month, French President Nicolas Sarkozy tried to convince French citizens about the plan, which still needs to be approved by parliament. He also said he would like other European countries to follow France’s lead and that France may impose tariffs on products from other countries that are not carbon friendly, to make up for the decreased competiveness of French industries.

The French carbon tax will take effect in January at the equivalent of $25 per ton of carbon dioxide emissions. That’s equal to about 23 cents per gallon of gasoline and it will be applied to diesel, gasoline, and coal. The French power sector, which gets 80 percent of its electricity from nuclear reactors, will not be affected. Most French said they oppose the measure, although slightly more than half also said they would agree if it was fiscally neutral, as Sarkozy claims.

Critics, including environmentalists, say the price per ton is too low to alter people’s behavior, although it will increase gradually over time. The initial proposal by an independent commission led by former Prime Minister Michel Rocard argued that the minimum price to have an effect is $46 per ton.

Other European countries, including Sweden, Denmark, and Norway, have already imposed carbon taxes, but France is the biggest country to embrace it. Sweden, which holds the rotating EU presidency, has been lobbying other member states for a Europe-wide tax. It was the first in 1991 to impose a carbon tax starting at $40 a ton. Now it is almost $168 a ton.

Spain and Ireland, which until recently were considered unlikely candidates to follow suit because of their high unemployment rates, are also weighing adding similar levies next year. Ireland’s Finance Minister, Brian Lenihan, said recently that the government would not raise taxes to finance next year’s budget, with the single exception of a carbon tax. He didn’t offer further details.

Spain’s Prime Minister Jose Luis Rodriguez Zapatero, which has announced a fiscal reform to raise more money to control a rampant deficit, called the carbon tax an “interesting” proposal and added carbon taxes will inevitably be applied by most countries. But he stopped short of saying he would include them in next year’s budget.

Still, it’s too early to call a trend, analysts said. European countries are nowhere near to surrendering fiscal control to European Union institutions. Countries might move on carbon taxes individually, but not as a block, said Paul Ekins, a European energy policy expert at the College University, London. “The issue of European taxation is problematic. It would make much more sense to impose at a European level, but so far that argument hasn’t been sufficiently strong.”

Still, the juncture has changed to make carbon taxes more appealing. For one thing, despite economic woes destroying employment throughout Europe, it’s politically less damaging to impose taxes with climate change in mind.

Sarkozy said the French tax would be neutral, meaning that the $4.4 billion that could be raised will be deducted from income taxes or returned as “green checks.” For countries like Spain and Ireland which need to raise taxes badly, it’ll be less unpopular if it’s an environmental tax. “What changed from three years ago are the result of the recession. Governments have to raise money and it makes sense because it also has positive environmental effect,” Ekins said.

There is also the proximity of the Copenhagen summit later this year when world leaders will try to draft the post-Kyoto roadmap to cut 1990 global emissions by half by 2050.

“It’s not surprising that in the run-up to Copenhagen governments are looking for ways to do some kind of positive contribution. It gives them a stronger bargaining position ahead of the summit,” Ekin said. “I wouldn’t be surprised if other countries imposed similar measures before hand.”